What happens when an employer wants a current employee to sign a new employment agreement? The employer must give the employee something in exchange for their signature to make the agreement binding, but how much is enough? In Giacomodonato v PearTree Securities Inc., the Court of Appeal for Ontario appears to have made the definitive statement on the subject.

The law

A contract is an agreement between parties where each party agrees to perform or refrain from an action. For a contract to be enforceable, each party must provide a thing of value to the other – which we refer to as “consideration” at law. That is what separates a contract from a promise and allows parties to a contract to sue for its breach.

A contract is formed once there is an offer by one party that is accepted by the other; there does not have to be a formal written document. An employment contract is the same as any other contract: an employee agrees to provide a thing of value (their services) in exchange for the employer doing the same (paying a salary). That is why having an employee sign a contract on their first day of work is a waste of time; there is already an agreement in place (unless the individual just happened to show up at the workplace and start working, which is unlikely).

The terms and conditions of an employee’s employment can be set out in a written employment agreement. If the agreement is properly drafted and implemented, these terms and conditions will then supersede the employee’s rights at common law, including their entitlements on dismissal. To make an employment agreement valid, an employer should have the employee review and sign it; only then will the individual have been hired.

The question we often get is what an employer is to do when it wants a current employee to sign a new agreement. It doesn’t matter whether the employee has been employed for 30 years or 30 minutes; either way, they cannot offer employment as consideration, because the individual already has the job. The consideration can be anything of value that the employee was not already entitled to, such as a raise, new benefit, or a signing bonus. Before the decision in PearTree, the amount of consideration that needed to be provided to make the new agreement to be binding was an open question. Was there a minimum amount? And more importantly, would a Court even care? Many were of the view that if a long-serving employee was being asked to give up substantial rights, the consideration would have to be commensurate with what they were giving up. However, the PearTree decision suggests otherwise.

The facts

In PearTree the plaintiff signed an employment agreement in April 2016, when he accepted employment. In July 2016, when he started work with the defendant, he signed a second employment agreement, receiving $40,000.00 and an additional two weeks’ vacation in return. Both the original and the July 2016 employment agreement provided the employee with a period of salary continuance on dismissal, calculated in different methods. In 2018, the defendant terminated the plaintiff’s employment. The plaintiff sued for wrongful dismissal and various heads of damages claiming an underpayment based on the terms of employment in the initial employment agreement of between $3,194,000.00 to $3,927,000.00. In its defence, the defendant relied on the terms of the July 2016 employment agreement to limit the plaintiff’s entitlement on dismissal. The plaintiff sought to have the July 2016 employment agreement set aside, asserting that the defendant had failed to provide him with fresh consideration when he signed it.

The trial

At trial, the judge upheld the July 2016 employment agreement. The trial judge noted that the defendant had agreed to pay the $40,000.00 to the plaintiff as a bonus when he started work, but that this had not been specified in the July 2016 agreement as consideration for his signature. The trial judge nevertheless found that the parties understood this to be consideration for the July 2016 employment agreement. The trial judge noted that even if the $40,000.00 had not been paid, the additional two weeks’ of vacation the plaintiff received for signing it was enough consideration.

The plaintiff was awarded damages based on the July 2016 agreement, receiving $661,765.00 in compensation over the contractual notice period and $10,000.00 punitive damages due to the defendant having ceased his compensation post-dismissal (and $830,761.75 in costs).

The appeal

The plaintiff appealed, claiming that the trial judge had erred in calculating the damages owed by using the July 2016 agreement instead of the April 2016 agreement.

The Court of Appeal reviewed the trial judge’s reasons, finding that the trial judge had “correctly observed…” that “…courts are concerned with the existence, rather than the adequacy of, consideration”.

In other words, the Court of Appeal confirmed that the amount of consideration is not the court’s concern;as long as an employee receives something of value in exchange for their signature, the requirement for consideration will be met.

Takeaways

PearTree stands as an example of the benefit of properly preparing and implementing an employment agreement. The plaintiff sued for nearly four million dollars. Because the court applied the terms of his employment agreement, he was awarded less than a fifth of that amount. The crucial detail was that he had received something for agreeing to be bound by the terms of the employment agreement that limited his entitlements on dismissal. Employers often pat themselves on the back for getting an employee to sign a new contract, ignorant to the fact that the test is not whether they sign, but whether a court will enforce the contract in the future.

This case also shows the importance of drafting. As noted at trial, the plaintiff received $40,000.00 and two weeks’ vacation for signing the July 2016 agreement, but the payment was not explicitly noted in the agreement. While the trial judge found the payment was consideration (and the two weeks’ vacation was enough), things would have been more straightforward if the payment had been noted in the July 2016 agreement. Our standard advice to employer clients is to put everything in writing: the consideration for a new employment agreement is no exception. A court reviewing the matter will want to see everything clearly laid out before it – having everything outlined in the employment agreement is one simple way to achieve this. The alternative can be complicated, expensive litigation – without a guarantee of success.